The economic recovery from Covid-19 is going well, according to, Pictet chief strategist Luca Paolini, such that the asset management house has reduced the equity exposure in its multi-asset range.
Following a torrid year in markets and a massive economic hit, the recovery from the Covid-19 pandemic does appear underway, as a global vaccine rollout allows lockdowns to ease and economies to reopen.
Equities in particular have seen a strong rally following the initial sell-off in March last year.
Indeed, Paolini said that global equity markets hit Pictet’s return targets for the whole year – 10 per cent - in the opening four months of 2021 alone.
He added to that much of the recovery is already being priced in, leading to a shift in the multi-asset allocation. Paolini explained: “Tentative signs that economic and corporate earnings growth may be peaking has led us to take some profits.
“We therefore downgrade equities to neutral and trim our exposure to cyclical stocks.”
According to Pictet’s business cycle indicators, the global economic recovery from Covid is going well but growth momentum has slowed slightly. This was clearly seen in China, according to Paolini, which had produced weaker than expected Q1 data.
“[This] prompted us to trim our 2021 GDP growth forecast there to 10.0 per cent from 10.5 per cent,” he said.
Moving onto the eurozone and Paolini said the recovery was not “self-sustaining yet”, relying on the successful control of the pandemic and ongoing vaccination rollout as well as the continuance of accommodative monetary and fiscal policies.
It was the opposite story in the US, however, where economic activity “continues to beat expectations”.
The US has been one of the strongest equity markets over the past 12 months since the Covid sell-off. But it has started to lose momentum compared to other more cyclical and value-biased markets, such as the UK, since the Covid-19 vaccines were confirmed and the recovery began.
Performance of S&P 500 vs UK indices
Source: FE Analytics
Paolini he expects US growth to peak in Q2 this year and continue to slow throughout the rest of 2021 as the $1.9trn fiscal boost starts to fade.
The state of equity valuations, especially in the US, was another reason for downgrading Pictet’s equity allocation.
Paolini said that while equities have delivered strong returns year-to-date the valuations are at a decade high and will require “unusually healthy conditions” to continue their rise.
“In our view, though, the favourable environment for risky assets may not last much longer,” he said.
The US equity stock market looks especially vulnerable to a pullback as the Federal Reserve may shift its policies around easing and possible headwinds may arise from president Biden’s proposed corporate tax policies.
But not everyone agrees that now is the time to pull back on equities.
BlackRock recently said that it is maintaining its pro-risk stance in portfolios through an equities overweight as it’s factoring in a strong economic rebound and greater willingness from central banks to tolerate higher inflation. It is also taking a pro-cyclical stance on stocks.
The BlackRock Investment Institute – which provides insight into the company’s long-term asset allocation and the global economy, markets and geopolitics outlook – said investors are currently grappling with how to interpret the “unusual” growth in markets and central bank shifting polices.
Allocating for this economic restart BlackRock said: “The broadening restart – coupled with our belief that this will not translate into significantly higher rates – underpins our pro-risk stance. We remain overweight equities, neutral credit and underweight government bonds on a tactical basis. Yet we have tweaked some of our tactical views given significant moves in market pricing.”
Going back to Pictet’s asset allocation and the fund house remains bullish on some areas of the market, namely emerging market currencies, US government bonds, Chinese government debt and real estate.
Pictet’s current asset allocation – May 2021
Source: Pictet Asset Management
On US bonds, Paolini explained that although there are more problems facing equity markets he continues to think that “US Treasury bonds offer the best returns within developed sovereign bond markets”.
The market appears to have priced in a Fed interest rate hike, despite no announcement in the central bank’s forecast. But he feels that the Fed will begin tapering its quantitative easing programme of asset purchases in order to give itself more breathing room on interest rates. “In other words the central bank does not wish to be forced into premature rate hikes,” he added.
Another area Pictet remains bullish on is sovereign Chinese bonds due to attractive valuations and diversification benefit.
In currencies the multi-asset team has an overweight to emerging market currencies while remaining neutral on the US dollar.
Paolini said: “Strategically though we remain bullish on EM [emerging market] currencies and expect the US dollar to resume its gradual shift lower when the growth outperformance of the US economy comes to an end.”